Do you hate paying taxes? Wouldn't it be great if there was an investment account that avoided them entirely? Well, this account does exist, but very few people use it effectively.

It's the Health Savings account or HSA, which most people don't think of as an investment account. But that's a mistake. And in this video I'm going to tell you why.

What is a Health Savings Account (HSA)?

An HSA is typically thought of as a savings account for health expenses, hence the “health savings account”, but you can actually invest within your HSA.

A study released this year by the Employee Benefits Research Institute found that only 12% of HSA account holders actually invested their HSA, which is just tragically low, because an HSA can be a better investment account than a 401k or an IRA.

So let's go over the basics of the HSA.

HSA Basics

HSAs are only available if you're enrolled in a high deductible health plan. And let me just say that a high deductible plan may not be the right health insurance for everybody. So you have to decide that based on your and or your family's health situation.

There's also an annual contribution limit to HSAs. And that limit depends on whether it's just you in the plan, or you have a spouse or kids on the plan as well.

One important thing to know about that contribution limit is employer contributions count towards that limit. Unlike a 401k where the employer contributions are separate. So, if your employer contributes to your HSA, you need to lower that contribution limit by whatever they contribute.

HSAs are triple tax advantaged, which means that your contributions are pre-tax, the money within the HSA grows tax free, and if you pull the money out of your HSA for qualified medical expenses, then the money comes out tax free as well.

If you pull money out for anything other than a qualified medical expense, you'll be taxed plus there'll be a 20% penalty on top of that.

What counts as a qualified medical expense is pretty broad. It includes everything from doctor visits, surgeries, over the counter medicines, and even things like sunscreen and prescription glasses.

How To Maximize Your HSA

Alright, so with what we know so far, if you just use your HSA to pay for qualified medical expenses, that money is never taxed, and that's a great benefit by itself.

But if that's how you're using your HSA, you're leaving a lot of money on the table. To maximize your HSA, you need to take a different approach.

There's a little known fact about HSAs that makes them super powerful. You can reimburse yourself out of your HSA for any medical expense incurred in the past as long as that expense happened while the HSA was opened.

And as we mentioned earlier, you can invest your HSA.

Usually there's a minimum that you have to keep in cash that might be two or three thousand dollars, but whatever your balance is on top of that can be invested.

The investments that are available in your HSA is going to depend on your HSA provider,

but there are usually plenty to choose from to match your risk tolerance.

So the way to take advantage of those two facts is to actually pay for your medical expenses out of pocket and not with the HSA.

You want to save your receipts and then at any point in the future, you can pull money out of your HSA to reimburse yourself for those expenses.

By doing this, you can keep the money within the HSA invested and growing. Rather than needing to pull it out every time a medical expense happens.

That growth within your HSA becomes additional money available for future tax free withdrawals.

The Importance Of Saving Medical Receipts

I want to emphasize the importance of saving your receipts because those withdrawals out of your HSA are going to show up on your tax return.

If you get audited by the IRS, you want to be able to show that that withdrawal that you made out of the HSA was reimbursing yourself for a medical expense that you previously paid for out of pocket.

In case of an audit, the IRS says that your records need to be sufficient to show that:

1. The distributions were to pay or reimburse qualified medical expenses
2. Those qualified medical expenses had not been paid or reimbursed from another source
3. The medical expenses had not been taken as an itemized deduction on your tax return in any previous year

I like to view those receipts that I paid for out of pocket as tax free coupons that I can use to pull out of my HSA whenever I want.

And you can also use that HSA to pay for medical expenses, even if you're no longer on a high deductible health plan. You just can't contribute anymore.

What If You Have Too Much Money In Your HSA?

A question I often get when explaining this strategy is, What if I end up with too much money in my HSA?

As in, I don't have enough medical expenses to reimburse myself for.

First off, congratulations.

Second, in that fortunate situation, your HSA becomes very similar to an IRA at age 65. You can withdraw money out of your HSA for anything. And while your withdrawals that aren't for medical expenses are going to be taxed, just like an IRA would be, they're not gonna be penalized.

Summary

To summarize, the way to supercharge your HSA into the best investment account available is to:

1. Max your contributions if you're able to. Otherwise just contribute whatever you can.
2. Pay for your medical expenses out of pocket and save those receipts.
3. Invest your HSA balance on top of the required cash minimum.
4. Let your HSA dollars grow within the HSA.
5. At some point in the future, reimburse yourself for those medical expenses that you paid for out of pocket and have the documentation to verify.

Using your HSA in this way changes it from a nice employee benefit to a wealth compounding machine.

As always, you should always consult with a financial professional before making changes to your financial plan. If you don't have a good financial planner to consult with, Trek Wealth Planning can help. Reach out to us for a free consultation.